Former Minister of Finance Zhu Guangyao: The Federal Reserve will not cut interest rates before June this year to consolidate the results of fighting inflation

On January 20, the World Financial Forum 2024 Beijing Summit and the 2024 World Economic and Financial Outlook Report Conference were held in Beijing, with the theme of "China and the World in 2024: Seeking Security and Cooperation in a Turbulent and Changing World". Zhu Guangyao, former Minister of Finance and Chief Advisor of the World Financial Forum (WFF) and the BRICS think tank CBGG, delivered a keynote speech.

He recalled several issues that deserved attention at the just-concluded Davos conference: the rapid development of artificial intelligence, the fourth industrial revolution has quietly begun, but it is also necessary to pay attention to the warning of IMF Managing Director Georgieva that 'although the development of artificial intelligence will greatly increase global labor productivity, it may affect 40% of jobs'.

In addition, the global economy has not yet fully recovered, and the pace of recovery is slower than widely expected. The Fed needs to consolidate the gains of the 11 pauses in rate hikes that began in March 2022. Zhu Guangyao believes that "the Fed will not cut interest rates before June this year. ”

Finally, Chu Guangyao specifically reminded that we need to pay attention to the changes in cryptocurrencies, "Cryptocurrencies will be very strong if they develop. The key now is for us to return to the G20 coordination mechanism to supervise and manage the international financial system and coordinate policies. ”

The following is the full transcript:

In the current global context, the world's eyes are focused on China, but also on the innovation of the technological revolution. It is widely expected that from 2023 onwards, with the rapid development of the field of artificial intelligence, a series of substantial major breakthroughs will be achieved. This expectation stems from the remarkable changes in the Fourth Industrial Revolution, or in other words, the Fourth Industrial Revolution has quietly begun. Previously, when we talked about the Fourth Industrial Revolution, we often talked about artificial intelligence, biopharmaceuticals, and other fields, but now the development of artificial intelligence and its applications have exceeded initial expectations, and it has not only made great progress in itself, but also greatly promoted innovation in other fields such as biopharmaceuticals.

At the time of the rise of the fourth industrial revolution, the development of the mainland in the field of artificial intelligence is at the forefront of the world, although there is still a certain gap compared with the United States, but the mainland has made significant progress in the expansion of application scenarios, the development of the digital economy, industrial digitization and digital industrialization. Over the past few years, the pace of development in these areas has been remarkable.

The Fourth Industrial Revolution, with artificial intelligence as the core driving force, is rapidly and significantly improving human productivity, creating unprecedented conditions for society. However, this progress has come with serious challenges.

Some of the discussions at the just-concluded Davos forum, especially the views of IMF Managing Director Georgieva, deserve our attention. She noted that the development of AI will greatly increase global labor productivity, but it may also have an impact on employment, especially for 40% of jobs. In high-income countries, the proportion can be as high as 60%.

In the face of these new challenges, we must carefully follow up and understand them in the new situation. While seizing the opportunities for productivity gains, we must also address these challenges. During the third industrial revolution, although there was a gap in China's comprehensive strength, we quickly caught up and developed digital industries and digital industrialization, making us a global leader in electronic payment, infrastructure construction and 5G technology. However, the challenges of the Fourth Industrial Revolution remain enormous, and we must remain vigilant, especially on an international stage such as the World Economic Forum.

At the beginning of the meeting, a global warning map was released, listing three major warnings:

The first caveat is that AI has undoubtedly dramatically increased global labor productivity, but the most immediate danger is the disinformation synthesized by AI. This information could cause riots in some countries and regions this year, 2024 to be exact. Because artificial intelligence is too scientific and high-end, it is difficult for people to distinguish the real from the fake, so he listed it as the first major risk.

The second risk is the escalating conflict around the world.

The third risk is economic uncertainty and expanding conflicts on a global scale. The Financial Eurasia Group, where I work, is the world's largest political risk consulting firm. Hua Ziqiang, the president of the Eurasia Group and the director of his China department, as well as some comrades who may have known in their economic dealings with the United States, used to be the head of the China section of the US State Department, a very key technocrat. In fact, as the head of the China organization of the State Department of the US State Department, he is now the head of China in the Eurasian group. Both he and the president said that the risks now deserve great attention. They announced these risks to the world at Davos and made the most authoritative note on this risk of conflict.

He noted that there are three major conflicts that could continue or occur in 2024.

First of all, the third major conflict that everyone knows, that is, the Russia-Ukraine conflict, which has been going on for almost two years, has been since its outbreak on February 24, 2022. The second major conflict is the Palestinian-Israeli conflict, which has been more than 100 days since it erupted on October 7, 2023. The third major conflict is what he defines as something that can break out at any time, that is, a war within the United States.

Eurasia Group, which is actually an American company, is the world's most authoritative and influential geopolitical risk consulting firm, with operations all over the world. He defined the third risk as an internal war in the United States that could break out at any time.

We can all know and feel this political polarization in the United States in practice, especially in the US presidential election on November 6 this year. Trump's Republican primaries last week, with more than 50 percent in Iowa, really sent a huge shake through the United States and had the biggest impact on the world.

As you can see, the strongest reaction at the recent Davos forum was the president of the European Central Bank. He was originally a professional in international financial institutions, and he was very sophisticated and mature in the data materials of the International Monetary Fund.

We should be wary of the third issue, which is economic uncertainty. At the moment, there are still several aspects of economic uncertainty, which I will quickly mention next, starting with monetary policy. I still don't think the Fed will raise interest rates until the middle of this year. Now Wall Street is rushing to drive market sentiment, but looking at the actual situation, the US CPI in December was 3.1%, and the core CPI (excluding energy and food prices) was 3.9%.

In this context, I believe that the Fed needs to consolidate the gains of the 11 pauses in rate hikes that began in March 2022, and the US federal funds rate is currently between 5.25% and 5.5%, and needs to consolidate the gains in the fight against inflation.

In any case, I don't think the Fed will be able to cut rates before June of this year. We observe that Wall Street is desperate to cut interest rates in March so that banks can make profits. The impact of Wall Street is highly professional, and they have all kinds of analysis, but we have to have an objective judgment. Therefore, our economic decisions cannot be based solely on Wall Street analysis, because it also has its own layout and arrangement, and it is considered in all aspects, so we need to stay sober.

The second problem is Bitcoin. On January 10, the U.S. Securities and Exchange Commission (SEC) approved 11 bitcoin spot trades. At that time, the chairman of the SEC said that they did not consider Bitcoin to be legal tender and always considered it to be very speculative and very volatile. But in any case, they approved the listing of Bitcoin ETFs (exchange-traded funds) on the New York Stock Exchange, NASDAQ, and Chicago Stock Exchange.

I remind you that in 2024, we need to pay close attention to the changes in cryptocurrencies. Due to its volatility, the market size of cryptocurrencies is now about $11.2 trillion, but it has already exceeded $2 trillion. The global market capitalization of gold is about $12 trillion, and the potential for the development of cryptocurrencies is very high.

Gold now has a global market capitalization of about $12 trillion, and cryptocurrencies will be very strong if they develop. The key now is for us to return to the G20 coordination mechanism to supervise and manage the international financial system and coordinate policies.

I don't think the global recovery has yet to be fully recovered, and the pace of recovery has been slower than widely expected. The key lies in the multilateral system, which has not really returned to its former state of globalization. The operation of the peripheral system is now much worse than before the epidemic, and mistrust, lack of communication, and lack of understanding have seriously restricted the coordination and cooperation of the global economy, which is a factor restricting the development of the global economy.

We now expect economic growth of 5.2% in 2024 to maintain sustainable economic growth. Because one of the bases of the potential growth rate of 5 to 6 percent that we are talking about now is that our existing fixed assets are effectively utilized, and it is generally accepted that this contribution to the Chinese economy is between 3.5 and 4 percent. Because we have such a large platform, and we can use it effectively, especially some can be replaced.

Then the other 1.5% to 2% is very critical, that is, total factor labor productivity, total factor productivity, total factor productivity is beyond the contribution of factors, that is, innovation-driven growth. That's why the fourth industrial chain should be here, and that's where it works, and innovation represents a huge increase in productivity, which is why the key to focusing on improving total factor productivity is particularly emphasized.

We should also grasp the green development of the economy and the realization of the dual carbon goal, because the realization of the dual carbon goal requires an investment of 139 trillion yuan. And every year before 2030, we need to invest 3 trillion, but now it's probably only about 1 trillion, so there's a big gap. In this regard, we should play the role of seed funds and bring about the active investment of private capital.

Achieving pricing is necessary to meet the Paris Agreement's climate goals, which are 1.5 degrees before industrialization, preferably no more than 1.5 degrees and no more than two degrees. So, in terms of carbon price, the latest forecast of the International Monetary Fund (IMF) today is $85 per tonne, and now the EU has reached more than 100 euros, and the United States has no unified standard, but the 30-year carbon trading price in the United States is more than $69, how much have we reduced?

We are truly the largest electricity market in the world. Because about 50% of our 100 tonnes of carbon emissions are electricity emissions, we trade electricity in this market, and that's half. But our price and coverage are really far from enough.

Since October 1 last year, the European Union has begun to formally implement the carbon border adjustment mechanism. The CBAM covers electricity, steel, aluminium, fertilisers, cement and hydrogen, and soon chemical raw materials and plastics, which means that all industrial goods will be included. We now need to raise the price of carbon on the one hand, and expand the coverage of products in the market on the other.

There is a price to be paid in the process, but in the latest report from the International Monetary Fund (IMF), I want to share with you, in 2030 countries may benefit more from carbon pricing than from cutting fuel taxes during tax cuts. The net budget revenue from promoting carbon pricing is very large at 0.2% to 0.2% of a country's GDP.

Higher-income countries have lower returns than upper-middle-income countries because their carbon emissions are already lower. The International Monetary Fund expects Russia to receive the highest budget revenue from carbon regulation, which is expected to account for 4.3% to 4.4% of GDP in 2023, and the second largest budget revenue from carbon regulation is likely to be China or France, but both second and third are very important.

But the GDP budget adds 2% to 3% of GDP by budget revenues, 1% in the United States, and 0 in the European Union. Everyone has also seen why the EU is in such a hurry to implement the carbon border adjustment mechanism. Also, keep in mind that on January 1, 2027, the UK will also introduce a carbon border adjustment tax on the Golden Tax. The largest contributor to Russia's carbon revenues will be the industrial sector, with the remainder coming from power generation, transport and buildings. I think maybe our biggest contribution in the future is not electricity, although the biggest one we have now is electricity, which is 50%, but because we started to reduce the emissions of electricity early, the contribution of the industrial sector to the budget revenue is probably very large.